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Trucking’s economic tea leaves remain cloudy

Reading the economic tea leaves for trucking can be a cloudy undertaking. This week is no exception as one new report indicates fleets are “throwing the brakes on new truck plans in the year ahead” while another states that Class 5 to 8 vehicle preliminary net orders for September “improved month-over-month beyond expectations.”

David Cullen, executive editor | Oct 05, 2011

Reading the economic tea leaves for trucking can be a cloudy undertaking. This week is no exception as one new report indicates fleets are “throwing the brakes on new truck plans in the year ahead” while another states that Class 5 to 8 vehicle preliminary net orders for September “improved month-over-month beyond expectations.”

But results of an annual logistics survey suggest that logistics suppliers have “largely adjusted to the new economic realities and are now investing in growth.” And per a survey of purchasing and supply executives, the non-manufacturing sector of the economy grew in September for the 22nd consecutive month.

Despite those elements of positive economic news, the Third Quarter 2011 Business Expectations Surv ey compiled by Transport Capital Partners (TCP) has found that only 5% of the motor carriers surveyed are planning to add 16% or more capacity in the next year. That’s down from 29% that had such plans just six months ago. Now, 73% of carriers say they either plan to not add capacity or to only add 5% or less.

The dampened volume and rate expectations reported in the survey has “injected a lack of confidence” in equipment investment, according to TCP. But the firm contends it is not just concern engendered by raw economic facts and figures that is behind this shift.

“The possibility of a double dip, high volatility in the stock market, lack of political leadership, and uncertain regulatory and tax policies all play into this,” said Richard Mikes, TCP partner and survey director.

“ Last quarter’s survey showed that carriers were split 50/50 as to whether profits were sufficient to justify new equipment,” remarked Lana Batts, TCP partner. “The continued poor economic news is likely to dampen new truck orders over the next year unless freight demand picks up.”

According to TCP, carriers that planned to add capacity have continued to shift toward company equipment, and away from contractors—and that is for almost every quarter since a year ago, from 13.5% to 26.2% currently. And fewer carriers (4.7%) indicate adding capacity by purchasing used trucks this quarter, “likely reflecting the scarce supply, higher mileage on used trucks, and 20 to 30% higher prices.” Mikes pointed out that “it appears contractors still are a constraint, used equipment is scarce, and pressure is mounting to refresh fleets more than to grow fleets.”

Batts noted that “truckers who began to see freight moving are now questioning our firm about what direction to turn regarding equipment purchases, since capacity is still tight in a 1% GDP growth reality.” Mikes added that “TCP believes the truck-replacement decisions are more complex than ever to weigh increasing repair costs against higher capital demands with new trucks and technology.”

Yet according to ACT Research Co. (ACT), new medium- and heavy-duty truck orders have yet to slow their pace. The firm has reported that North America Class 5 to 8 commercial vehicle preliminary net orders for September improved month-over-month “beyond expectations.”

The final numbers, which will be released in mid-October, will approach 23,800 units for heavy- duty Class 8 trucks and 13,800 for medium Class 5 to 7 vehicles. Both vehicle categories have also posted positive year-over-year gains. The preliminary net order numbers are typically accurate to within 5% of actual, noted ACT.

“The strength in orders is indicative of healthy underlying fundamentals in the heavy-truck market,” said Kenny Vieth, ACT president and senior analyst. “Fleet equipment is old, trucker profitability is good, and used-truck values are strong; barring an economic collapse, these factors should support continued strength in Class 8 orders,” he added.

Also giving off a positive sheen is the 18th Annual Survey of Third-Party Logistics Providers, which was presented yesterday at the Council of Supply Chain Management Professionals Annual Global Conference by survey author Dr. Robert Lieb, professor of Supply Chain Management at Northeastern University , and Joe Gallick , senior vp of sales for Penske Logistics , which underwrites the survey.

Per the author, economic conditions appeared to slightly improve for third-party logistics companies surveyed in 2010 in North America: “None of the companies were unprofitable and none of the CEOs believed the regional third-party logistics industry operated at a loss for the year. In Europe, economic conditions continued to be challenging for third-party logistics companies with only 55% of companies surveyed meeting or exceeding their revenue growth projections for the year, as opposed to 90% of companies surveyed in Asia-Pacific. Growth projections are most optimistic in Asia, with companies expecting to grow 15.8% in the next year, as compared to 10.8% expected in North America and 8.4% in Europe.“

Lieb noted that “CEOs continue to grapple with industry dynamics such as a stagnating economy, pricing pressures, rising costs and the impact of regulatory changes. These are similar to the trends we’ve been seeing in years past, and we are confident that the industry can adapt.”

With few exceptions, the CEOs surveyed are “more bullish” about the financial prospects of their companies over the next one- and three-year periods:

One-year company revenue growth projections were 10.8% for North America (10.4% in 2010), 8.4% for Europe (7.2% in 2010), and 15.8% for APAC (22.5% in 2010). The average three-year company growth projections were 10.3% for North America (10.6% in 2010), 9.1% for Europe (8.3% in 2010), and 14.6% for APAC (19.5% in 2010).

One-year regional 3PL industry revenue growth projections averaged 6.8% for North America (7.3% in 2010), 6.1% for Europe (4.8% in 2010), and 9.0% for APAC (15.4% in 2010). The average three-year regional 3PL industry growth projections were 8.0% for North America (7.8% in 2010), 6.3% for Europe (5.4% in 2010), and 10.3% for APAC (12.9% in 2010).

Twenty-eight of the 36 CEOs surveyed reported their companies were profitable during 2010, with three reporting they broke even, and three reporting their companies were unprofitable.

Only five of the 36 CEOs reported their companies were involved in significant M&A activity in their regions during the past year.

Most believed the 3PL consolidation movement will continue in their regions.

CEOs in all regions expect less than 9% of their companies’ average annual revenue growth to come from M&A over the next three years.

“This year’s survey indicates the logistics industry has largely adjusted to the new economic realities and are now investing in growth,” stated Gallick. “Companies are leaner and more adaptive than just a few years ago. Today, logistics companies are better positioned to help serve their customers as catalysts for supply chain transformation and innovation, which ultimately drives their own growth prospects.”

And according to the latest Non-Manufacturing ISM Report on Business, issued today, economic activity in the non-manufacturing sector grew in September for the 22nd consecutive month, per surveyed purchasing and supply executives. The report was put out by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee.

“The NMI registered 53% in September, 0.3 percentage point lower than the 53.3% registered in August, and indicating continued growth at a slightly slower rate in the non-manufacturing sector,” said Nieves. “The Non-Manufacturing Business Activity Index increased 1.5 percentage points to 57.1% reflecting growth for the 26th consecutive month”

The New Orders Index increased by 3.7 percentage points to 56.5% and the Employment Index decreased 2.9 percentage points to 48.7%, indicating contraction in employment after 12 consecutive months of growth, according to Nieves.

The Prices Index decreased 2.3 percentage points to 61.9%, “indicating prices increased at a slower rate in September when compared to August.”

According to the NMI, nine non-manufacturing industries reported growth in September.

However, noted Nieves, respondents’ comments “reflect an uncertainty about future business conditions and the direction of the economy.”

The report is published monthly by the Institute for Supply Management, the largest supply management research and education organization in the U.S.

Full text version of the Non-Manufacturing ISM Report on Business is posted on ISM's Web site at http://www.ism.wson the third business day of every month after 10:10 a.m. (ET).